A case for services exports

The trade deficit has ballooned to $30 billion for Jul-May 2017. And economic observers are ringing alarm. But are they asking the right questions? The discourse is fixated on ‘export in goods’ and what the government did or did not do to motivate industrialists who seem more interested in domestic commerce than exports. It’s time to pay attention to ‘export in services’, which, ostensibly due to their relatively small size (equivalent to about a quarter of goods exports any given year) often receive secondary treatment.

If you believe that a decade is a long time, you won’t mind chewing these numbers first. In the ten years ending FY16, SBP data show, Pakistan exported services worth a total of $51 billion (for a breakup, see the illustration). At their peak, services exports clocked $6.73 billion in FY13 – some 2.9 percent of the GDP that year. In FY16, Pakistan’s services exports went below 2 percent of the GDP for the first time last decade. Globally, service exports are roughly about 6 percent of the world GDP.

Just as many other developing economies, Pakistan, too, is a net service importer. In the decade under review, Pakistan imported services worth a total of $83 billion. The resulting services deficit meant an addition, on average, of just over $3 billion every year to a gradually expanding goods deficit. To keep that number in perspective, $3 billion is equivalent to the average current account deficit in the last three fiscals. Services deficit, in terms of GDP, averaged 1.6 percent in the last decade, hovering around 1 percent in recent years.

It is time to have a hard look at services exports. Starting off, government services exports – which comprise of proceeds from embassies and consulates, military units and agencies, and other government goods and services – have accounted for over two-fifth of all service exports in the last decade, thanks mainly to CSF inflows. Since this heavyweight area is non-commercial in nature and keeps fluctuating on account of CSF, let’s instead discuss the areas that offer the most market promise and where a little policy nudge can go a long way.

That the case for improving software exports still has to be made is unfortunate. Pakistan is punching way below its weight in this area. Within global software exports of over $300 billion in 2014, Pakistan had a share of less than 0.2 percent. This is way lower than 25 percent for India, an economy seven times Pakistan’s size. It’s not like Pakistan has missed the boat for good, but a lot needs to be done to catch up.

The government has a clear responsibility to enable the sector by offering fiscal incentives and making IT education affordable. But the private sector also must step up. Government officials suspect that software exporters are already earning billions of dollars from their Pakistan operations but they remit back home only a fraction of it, just enough to spend on administrative overheads and the like.

Another opportunity rests in regional connectivity. Pakistan’s services exports to its immediate neighbourhood are really low. Whereas close to half of Pakistan’s services exports go to just US and UK (see the illustration), less than one percent of the proceeds come from the Saarc region. By opening up, Pakistan can gradually boost its transport services exports – which accounted for over a quarter of service exports in the last decade – especially in road and rail transport. CPEC holds promise in that regard.

Then there is travel and tourism. On one hand, the improving security situation should make the leisure traveler comfortable to visit Pakistan; on the other hand, CPEC-related business sentiment should attract more business travelers to Pakistan. Then Pakistan also holds distinct attraction in religious tourism for the Sikh community living in India and the West.

But it won’t be easy to make things happen considering where things stand. While tourism is a provincial subject, Pakistan’s circumstances require a national tourism body that can ‘coordinate’ tourism-development aspects such as access roads, quality standards (for accommodation, transportation and food), tourist activities, waste management, safety & security, tourist facilitation (e.g. tour guides and visa process), etc.

Another potential export service is the stock of highly-qualified human capital Pakistan has been slowly accumulating. The country produces top-class healthcare practitioners, who often venture abroad, but if they’re provided opportunities here, Pakistan can attract significant health-related services exports. A similar case can be made for higher education exports, particularly in the fields of medicine and management studies. Then there are skilled individuals in professions such as legal, accounting, consulting, and research-related services.

It is true that globally, top service exporters happen to be in advanced economies. But India defies that norm. Thanks to its IT, travel, and business services sectors, India had a 3.2 percent share in the roughly $5 trillion global services export in 2014, as per a recent IMF working paper. Pakistan had a meager 0.11 percent share in global services exports. The country may be late, but is it ever too late to start?